Relaxo Footwears Limited (530517) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q2 FY '21 Earnings Conference Call of Relaxo Footwear hosted by Axis Capital Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Gaurav Jogani from Axis Capital Limited. Thank you. And over to you, sir.

Thank you, Rutuja. Hello, everyone. On behalf of Axis Capital, I would like to welcome you all to Relaxo Footwear's Q2 FY '21 Earnings Conference Call. We have with us today from the management, Mr. Ramesh Kumar Dua, Managing Director; Mr. Ritesh Dua, Executive Vice President, Finance; Mr. Gaurav Dua, Executive Vice President, Marketing; Mr. Sushil Batra, CFO; Mr. Vikas Tak, Company Secretary. The management will give a short brief about the results, and then we can proceed ahead with the Q&A session post that. Thank you, and over to you, sir.

Good afternoon. I'm Sushil Batra from Relaxo. Ladies and gentlemen, thank you very much for attending our earnings call for the quarter 2 FY '21. We have already shared our earnings press release and results presentation. Hope you got an opportunity to go through that. I will start with the Q2 FY '21 financial performance, followed by H1 FY '21 financial performance. In Q2 FY '21, Relaxo booked an operating revenue of INR 576 crores as compared to INR 622 crores in the corresponding period of the previous year. The drop in revenue in Q2 is due to disruption in economic activity caused by COVID-19 pandemic. Benign raw material prices and saving in administrative expenses led to an improvement in the EBITDA margin to 22% as against 16.8% in same quarter last year. Other income stood at INR 5 crore as compared to INR 2 crore in the corresponding period of previous year. The increase is mainly on account of lease rent waiver or reduction of INR 2 crore agreed by lessors for our rented premises. Profit before tax was INR 100 crore for the quarter, up by 35% year-on-year with a PBT margin of 17.4%. Tax expenses for the quarter and half year ended March 30, 2020, reflect changes made by Taxation Law Amendment Ordinance 2019 as adopted by the company. Therefore, effective tax rate of quarter ended March 30, 2020, is not comparable with previous comparative period of September 30, 2019, as the company had recognized the full impact of this change in profit and loss for the quarter ended March 30, 2019. Profit after tax at INR 75 crore for the quarter is up by 6% year-on-year with a PAT margin of 13%. For first half of FY 2021, we registered a revenue of INR 939 crore as compared to INR 1,270 crore in the corresponding period of the previous year. EBITDA margin increased to 19.6% from 16.6% while PAT margin increased to 10.6% from 9.5%, helped by favorable raw material prices. At the end of September 30, 2020, we have 396 exclusive brand outlets, which contribute around 5% to our H1 FY '21 revenues. We have added net 6 new stores in this period. Exports are also picking up with opening of markets and are contributing 4% of revenue. Going forward, we are cautious about the recent rising trend of raw material prices. We would continue our effort to grow our presence in untapped and underpenetrated market and focus on strengthening our brand. We can now open the floor for questions and answer. Thank you very much.

[Operator Instructions] The first question is from the line of Archana Gude from IDBI Capital.

Congratulations on a good set of numbers. I have 3 questions from my side. So firstly, I would like to know how was the demand scenario in Q2 and some color on the brand-wise performance for us.

Yes. So see, after the opening up of northern markets, like Delhi was the first one to open up, so in quarter 2, we saw good demand picking up from the rural India. And if you see brand wise, the Sparx category, which consist of closed footwear majorly, there has been an impact there. But in open footwear, we are getting a good demand for the Hawaii brand, the Flite brand and the Bahamas. So there is a good demand coming in open footwear because -- the second thing is work-from-home is also happening. So there is more demand of open footwear and less for the closed shoes. Similar trends in quarter 2, yes.

Sure, sir. Sir, I was just going through your presentation and it suggests that we don't have presence through EBOs in Southern India. So your comment on this, like how we should look at it? Is that intentional or how you intend to grow in the Southern market?

Our purpose of EBO is a little different, strategic one. Here, they are a kind of display-cum-exhibition sale counters, where our purpose is to capture the voice of the consumer. And affordingly develop the new products so that we can understand the evolving need of the consumer about our current products, the new products that we are being launched. And so currently, we have around 400 outlets. But that's enough to understand the market. But if you want to go to South and West, then it is a different thing. Till commercially, this becomes entirely, what you call it, more economical sense. Today, it is serving us what we call it a marketing sense, where we understand the market. So from that point of view, our objective is being well met with. So currently, we don't have any plans to have such kind of outlets in other parts of the country. That's it.

Sure, sir. And sir, like some guidance on the raw material prices trend? And what kind of sustainable EBITDA margin you look forward, let's say, for FY '21 and '22?

So far, the raw material prices have been quite, I call it, benign. In the fourth quarter, that is January, February, March, there, definitely, the prices are changing and things will be different. So we have to wait and see how actually the things fold up and then we will decide the way things are.

Sure. And sir, just follow-up on my last question. Given the category of footwear we are into, is it really easy to pass on any price hike if the raw deal prices go up? Or how we look at that situation, sir?

That depends upon what kind of price hike or what kind of prices have changed in the raw material. In case of nominal, we don't want to intervene at that stage. But if there is a major, then we do review the costing of our products, and then quarterly, then we pass and then it is not difficult. Any price hike based on genuine input increase is never a question. It is only when we want to increase the price without any genuine reason, then that is questionable. So that is our policy which we have been following in the whole history of Relaxo and that we'll continue to follow.

The next question is from the line of Ritesh Gupta from AMBIT Capital.

Sir, just continuing on the RM and the gross margin bit, I mean, we have seen some of the best gross margins being posted in this quarter, I think much better than what you have reported in a fairly long history. So would it be attributed to the crude price kind of collapsing and kind of that coming to your benefit? And is there any price hike? I think I remember you had about 2%, 3% price hike a few months back. So is it also kind of impacting? And just remind us on what kind of pricing action you have taken in the last 6 months or so, if you have any? And because, I think, gross margin is also not understandable in the sense that closed footwear has been reasonably weak and probably it might have had some impact on the mix as well. So just want to understand the gross margins a bit, and if there is any one-off in these numbers?

The current situation what we are in, now things are a little changing. In the first 6 months, there were no -- marketing expenses were controlled. Other administrative expenses, we had controlled. Now when the market had started opening, then we'll have to do more expenses on marketing, sales promotion, brand building and all that. And they were saving on travel expenses. They were saving on other administrative expenses also. Raw material also was quite comfortable pricing. Now on the one hand, prices will also of raw material go up. We will -- travel expenses and marketing and brand building everything will go up. So this -- whatever we have achieved in quarter 3, doesn't mean it is going to be the norm of the day. Things -- we have to be in the market in a competitive manner. And accordingly, we have to take all kinds of our decisions what we are in. So as far as the third or fourth quarter is concerned, since our expenses will be more, so this kind of EBITDA margin we should not expect. Margin will be good, better, but it will be in a more reasonable manner. And let us wait how the raw material prices we come to know in the fourth quarter of it. Accordingly, if whenever some intervention of price increase is required, then we'll do. We have to review quarter-by-quarter what are the price of the raw material, other inputs, market scenario, competitiveness of the articles in the market and then we have to take a mature design on that. That's it.

Understood, sir. And if you could just highlight, was there any reduction in discounts, et cetera, you did in the last quarter, given probably your competition may be facing supply side challenges? Or that's not the...

No, no, you're correct. Definitely, in trade level also, the discounts offered were low. And same thing happened in ATL and BTL expenditure also. It was not there in quarter 2. So now everything has started in quarter 3, be it advertisement, BTL, ATL and the promotional scheme for the distributor and retailers.

Understood, sir. And just -- would you be able to guide us on what kind of volume growth that you saw in this quarter, if at all you can disclose?

Just a moment.

What's your question, volume growth?

Yes. Yes.

Volume growth is around overall 3% -- 3% to 4% at company level.

Okay. So basically, you had a mix decline because of which your top line is less than 7% decline, but actually, you had a volume decline of 3%...

Volume growth is 2%.

Understood, sir. Understood. And sir, I mean, in terms of -- any benefits that you're seeing from COVID on a long-term basis, like -- because -- I'm sorry, at the lower end of, let's say, a slipper portfolio, there are many unorganized players as well. And, I think, in the last -- I mean have you seen any kind of disruptions on that side? Any opportunity to gain market share, did you see that?

Yes, actually, what has happened because of COVID, work-from-home culture is here to stay. So the demand for the slippers and open footwear category will maintain at least for 1 to 2 years what we are seeing. So -- and the outgoing, party wear is reducing. So for us, we make informal footwear and specifically open footwear. So I think for 2 to 3 years, this will continue. The demand will be more.

Understood. And if I can squeeze the last one. I mean, on the export side, I think, last call, you had said that you were looking at exports much more aggressively and you were looking at a couple of global markets as well. I think you made this comment, I think in AGM or probably in your last call. I just wanted to understand, is there a thought process on any specific countries you're targeting or any competitive advantages that you carry with yourself in those export markets? So if you could just talk about that, that would also be helpful.

See...

You can, Ritesh.

Yes. Ritesh Dua. In export markets, this has been a similar position like India only, like after COVID the market had been affected in the same way, international market also. And as far as -- what's your other question you're asking?

No, I just wanted to see that what is your competitive advantages as you get into some of the other markets when...

We have been exporting in our own brand name. So that is helping us out because that we are getting sustainable growth year-on-year because of using our own brand. The maximum footwear industry, whether I talk about China and other countries, they always provide the products in the private level. But we are doing in our own name, own brand. So that is giving us advantage for the future. And the markets we are focusing majorly, we are focusing on Gulf markets, which is a major market for us. Side by side, we are getting now traction from Africa region and Oceana and Central America. These are the 4 regions where we are getting traction from.

Is it that you are able to provide these products at cheaper prices, even let's say what the Chinese or Bangladeshi competition would be? I don't know which countries are the larger competitive...

Actually, what we are doing is our quality standards whatever we are maintaining in India, we are following the same quality standards wherever we are entering into, right? So our price points are higher than the Chinese counterpart, wherever we are selling. But we are able to get the same quality standard that we are maintaining.

The next question is from the line of Nihal Jham from Edelweiss.

Sir, 3 questions from my side. The first one is, if I look at your recovery, be it in terms of volume or revenue for this quarter, it has been maybe better than a lot of the other similar categories. So I, first of all, just wanted to get a sense that at the end dealer or retail level, is the growth in volumes and revenue similar or there has been a channel filling which has helped improve the reported numbers at least at our end?

Can you repeat the question, please?

Yes, sir. Am I audible to you?

Yes, yes.

Yes. Sir, I was asking that when I look at your revenue de-growth of just 7% and even the volume growth of 2%, the recovery has been much better than anticipated. So I just wanted to get a sense that is the recovery at the end dealer level also similar or there has been some sense of increase in inventory in the channel because that may have got a little reduced because of limited supply initially? So that is the first question from my side.

See both things has happened. The pipeline work got empty in quarter -- starting of quarter 2. And secondly, there is a high demand coming from the Bharat or rural India, what we call. So demand for open footwear is quite high. And definitely, availability has improved from our factories, and it has helped us to grow. It's similar with the retailers and distributors.

Sure, sir. And tertiary sales or end-level sales would be more or less similar to the company reported sales at this point in time for Q2?

Yes, yes. Yes.

That's helpful. Sir, I'm not sure, but do you disclose the share of e-commerce and approximately what was the contribution for this quarter?

The e-commerce, we are doing 10% of our total sales, if you see quarter 2. For quarter 1, it was all closed, so there was no sale coming in quarter 1. Quarter 2 is 10% growth compared to last year quarter 2.

10% growth. And as a share of our total sales, what would be e-commerce contribution?

That is also 10%.

That is also 10%.

Okay, sure. And last question from my side, sir. Traditionally, whenever we've seen spurt in, say, gross margin because of falling raw material prices, ideally, how do we end up using that benefit? Do we end up cutting prices or end up increasing our ATL, BTL spends? Just wanted a sense of that scenario in case it plays out ahead?

We have to see. It is a longer duration of time. It is not in one month prices go down and then we have to take some radical decision. We have to see how these 3 months or 6 months play out. If I find today raw material has gone down, but I find in the third quarter they are going to come up and with every occasion, we'll find out. So then we'll take a decision. By and large, if we see a period of longer, 6 months or more, then things average out. So no immediate intervention is required for any kind of things.

Absolutely, sir. But I'm just saying that in case, say, there is a sustained continuation of the current gross margin, then would we say, look at reducing prices or would we look at...

Sir, already, I have told you quarter 4, raw materials are going up. We are booking the material at a new rate, which are quite high. Rather it is a situation of other way around, I don't know in the quarter 4 we may have to look for upward revision of the price.

The next question is from the line of Tejash Shah from Spark Capital.

Sir, you spoke about channel-wise split of the growth. If you can give some color on region-wise also, if any particular region or South India, in particular, did better than others?

So South India and West India, they did not pick up because as everybody knows, Maharashtra was last to open up, similarly Kerala is still under lockdown. So South India and West India is hardest hit. So the survival -- the best part for us was we have done very well in the North region and East region, which was less affected and opened up quite early.

And then, sir, growth is -- so South and West will be materially deep into de-growth versus our reported numbers or they are in vicinity of reported numbers?

So they are in de-growth, no doubt about it. South India is in de-growth because they are last to open up and Sparx also the highest...

Okay. Sir, second question is, you spoke about that we were able to actually make stuff available versus competition. And I'm assuming, as we have noticed in many other categories that unorganized had much more supply shocks than organized players. So would it be a fair assumption that you would have gained market share in the last 2 quarters versus unorganized? And once they stabilized the supply chain, perhaps the competitive pressure might come back in coming quarters?

Yes, yes, yes. You're right. Initially, we got a good market in those first and second quarter. But now the supply is coming from the competition. So that competitive edge is not as relevant what it was before.

And sir, if you can give some color on how the festive season is going so far? How Durga Puja was? And when do you see recovery coming back fully for us and for the sector at large?

So October has been nice for us, and the festive season picked up. Now the -- all the markets are open except Kerala. So we are getting good -- recovery is there. Good recovery is coming. Yes.

And this is across strata in the sense you spoke about Bharat versus urban. So urban is also participating now?

Yes, yes, definitely. Everywhere, across.

The next question is from the line of Dhaval Mehta from ASK Investment Managers.

Congrats on a decent set of numbers. Sir, my first question is with respect to category growth. So I understand there is no data but any ballpark number what would have been the category decline, let's say, in Q2?

One of the categories which have not grown or rather declined is canvas shoe, Schoolmate. Because schools are closed, canvas shoes, school-related also, otherwise also and closed category, whether it is sports because people are not moving out. So that category has affected. But other articles like rather in open footwear, slippers, sandals, they are all right. Not an issue.

So normally, shoes as a category is how big in terms of overall footwear?

Around 10%.

Okay. Including formal, sports shoes and canvas shoes?

We don't have formal. We are all informal.

No, no, not us, but I'm talking about the category as a whole.

The category for the country or for us?

Yes, for the country, for the industry.

No, I can't say. I can't tell on that. I can tell about my company.

Okay. Okay. Okay. Sir, my second question is you told that open footwear is doing well. We know that. We understand that open footwear as a category is doing quite well. And normally, earlier open footwear used to be more of a seasonal category where it largely used to sell more in summer. So now, let's say, in summer, summers will be approaching fast, so can there be any manufacturing glitch because the demand will be much higher? And so do we have the capacity to manufacture the increasing demand if it comes?

Yes, yes.

Yes, we have good capacity. Always, we have a capacity cushion of 30%, 40% more. So that will not be an issue.

Okay. Okay. And my last question is in terms of overall dealers -- so for dealers, it would have been a very difficult phase in -- time in the last 6 months. So have we seen any of our dealers closed down? So any thoughts on that?

See, I'm telling before also that in West India and South India, there has been a big problem because of opening up late. So many shops have closed, but it's still difficult to say what is the exact number because, as you know, Kerala is still under lockdown. And in Bombay, also, it's been majorly hit. So we don't have exact data right now, but definitely, there has been some closures. But in terms of the channel trade, distributors, they are working.

They're intact.

They're intact. Yes.

So the retail universe may come down, but for us, the channel distributors are same, still they have not declined, right?

Yes. They are not declined.

The next question is from the line of Sabyasachi Mukerji from Centrum PMS.

I have a couple of questions. First is, if you can help me with the total numbers of units sold in H1? I believe in FY '20, you have sold around 18 crores pairs of shoes -- shoes, slippers, both. What is the number in H1 this year?

We can tell you revenue for the half H1, which was this year that has been INR 39 crores.

Number, we generally share at annual level. We can share the value part, but yes, number we share at balance sheet annual level. Not half yearly or otherwise.

No issue, sir. Can you just help me with the volume growth in H1? You mentioned 2% in Q2. What would be H1?

H1 is minus 13% because quarter 1 was almost closed -- or 2 months were not working.

Then, sir, my second question is, any sense on the margins of open footwear versus closed footwear. Is open footwear...

No, no. Our pricing policy...

Is your question complete or still to ask?

Hello?

Please give me a moment, sir. Sir, his line has been disconnected. Please give me a moment. [Technical Difficulty]

Hello? You are there?

Mr. Bhargav Buddhadev, please go ahead.

Can you hear me?

Yes.

Yes.

Sir, my first question is, has there been any increase in the distribution footprint and the retail reach for us during the first half?

Yes, definitely, we are seeing demand coming from all across India for the open footwear. So we have increased the number of distributors and dealers.

Sir, is it possible to quantify it?

It's quite difficult right now to quantify the numbers, yes.

Secondly, sir, we understand there has been some increase in deposits from distributors. Is it possible to highlight what could be the reason for this?

Can you repeat the question?

Sir, we understand that Relaxo has increased the number of deposits from distributors, the amount of deposit. So what could be the reason for this?

We have increased the surety amount from each distributor, for new distributor as well as the existing distributor. So just to bring more big player and serious people in the business. So that's why this amount was increased in last 6 months. We are working on that.

It was in pipeline only. After COVID, we implemented in June. Otherwise, it would have been implemented in April itself.

And the security amount is similar for new distributors as compared to the old or is it different?

Similar, similar, similar.

The next question is from the line of Bharat Chhoda from ICICIdirect.

Actually, I had 3 questions. Like, could you just share what is the revenue share from Tier 2, Tier 3 or metro cities?

Sir, we don't have this kind of classification. We generally look on overall figures, state wise, district wise, not Tier wise. Sorry, we will not be able to give.

Or you can rural, urban, something like that?

We don't have classification like that. We go region wise, state wise.

Okay. And sir, on this open footwear part, what is revenue share of open footwear on the entire revenue mix?